Tesla warns that the Model 3 is about to lose half of its tax credit in the US

A federal tax credit funded through the Inflation Reduction Act can currently shave up to $7,500 off the price of Tesla’s Model 3, but that’s about to drop in half. The tax credit will fall to $3,750 by January 1st, 2024 for the Model 3 Rear-Wheel Drive and Model 3 Long Range, the company warned.

Elon Musk’s company made the announcement via a banner on Tesla’s website, TechCrunch reports. Starting at around $36,000, the Model 3 comes with the lowest cost of any Tesla vehicle. Now, Tesla says the full tax credit will only be available to deliveries made through December.

Why? It looks like Tesla will be unable to meet sourcing requirements under the Inflation Reduction Act (IRA). That might also affect tax credits for the Model Y and Model X next year.

The Clean Vehicle Tax Credit can save customers up to $7,500 on a new electric vehicle. But before that kicks in, carmakers need to meet a bunch of requirements around where the vehicle and its battery were made and how it sourced materials. The Department of the Treasury proposed new guidance for tax credits within the IRA last week.

Starting next year, “an eligible clean vehicle may not contain any battery components that are manufactured or assembled by a [foreign entity of concern] FEOC,” the new guidance says. The Department of Energy says FEOCs include entities “owned by, controlled by, or subject to the jurisdiction or direction of” governments including China, Russia, North Korea, and Iran.

Tesla has another motivation to warn customers about the diminished tax credit: end-of-year sales. The company traditionally tries to get as many cars out the door as it can before the new year in a push to meet its delivery targets. This year, Tesla has said it expects to sell 1.8 million vehicles.